Finnair - Cost uncertainty surfaces

Finnair will continue to lag peers especially in H1’22

Q4 RPK was very close to what we had estimated despite the onset of Omicron; the latest variant(s) have indicated how there’s robust pent-up travel demand as traffic figures continued to grow in December despite uncertainty related to restrictions. Meanwhile Finnair’s flows continue to lag those of Western peers as Asian volume recovery is further delayed. We believe China is still set to open in H2’22, but we now expect Japan and South Korea not to contribute much before Q2’22. In our view the Asian lag isn’t a major issue for Finnair considering the measures taken to reinforce balance sheet as well as the fact that cash flow already turned positive in Q3. The short as well as long term effects of Omicron are hard to discern because the infection peak happens to play out over months which are very different in terms of seasonal demand, and it’s still too early to say whether the variant might accelerate the pandemic towards its end.

OPEX cuts help but jet fuel prices have continued to gain

Jet fuel prices have continued to soar, the spot rate up by some 15% in the past three months, meaning the achieved operating expenditure cuts will be valuable in securing profitability during the quarters and years ahead. We expect Q1’22 EBIT to remain in the red similarly as in Q4’21, roughly to the tune of EUR 100m, while we believe some improvement will happen in Q2 but not nearly enough to reach break-even. We make only very minor downward revisions to our volume and revenue estimates, but we revise our FY ’22 EBIT estimate down to EUR -11m (prev. EUR 30m) and that for FY ’23 down to EUR 164m (prev. EUR 232m).

Valuation seems to have turned dear amid cost uncertainty

Many carriers’ valuations have advanced in the past few months, and thus Finnair also arguably deserves some further boost. Finnair’s recovery will however take longer than those of peers; the company close 15x EV/EBIT on our FY ’23 estimates, a slight premium relative to a sector that seems itself fully valued. Our TP is now EUR 0.60 (0.65); our new rating is SELL (HOLD).